Marvelous Monday, but small investors don't buy or sell

Monday's stock market rally has probably caught the small investor by surprise. Having burnt his fingers in a bad bear phase recently, the small investor had exited the stock markets and was only too scared to re-enter.

So Monday's turn of events, the opening followed by circuit breakers, has only made him wonder if he has missed the bus.

If you are among the scores of such small investors, then the good news is, you haven't missed the bus. Wealth spoke to experts to find out what the small investor should be doing now.

Question 1: Should you buy?

Answer: No

Certified Financial Planner, Karthik Jhaveri says, “Don’t go overboard and buy anything right now; you might fall off the cliff again.”

In the last two months, the Sensex has increased by 50 per cent. However, Jhaveri explains, the companies haven’t made that kind of profits yet. So, there is no basis for you to buy in this rally. He expects a market correction of 20 per cent very soon.

Certified Financial Planner Anil Rego mirrors this. He says, "This rally has been very good. Stability of the government is a good thing, and it has had a positive effect on market sentiment. However, the crucial factors that you need to look at while investing in stocks are how the economy and global markets are faring, and also the performance of companies. Markets will be volatile, so you need to be cautious about buying."

Rego expects a correction within the next 3 to 6 months and in the range of 15 to 25 per cent. So if you want to buy, go ahead. But do it with a long term horizon, he cautions. He also advices that you space out your investments and not invest in lump sum.

Question 2: Should you sell?

Answer: No

Chartered Accountant and financial domain trainer PV Subramanyam says, “Retail investors shouldn’t be selling on a day like this. If you don’t need the money right now, there’s no need to sell.”

He reminds us of the age-old principle of equity investing: You shouldn’t sell unless you have a specific purpose. Why take out money when there could be an opportunity for you to make more profit on a later date. After all, equity is for the long term.

He however adds, "If you must sell, then do so if you have made a profit of about 15-18 per cent."

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Rego too advices that you sell only if you must.

Time tested rules of equity investing

Events like these are a good time to revisit time tested principles. So let us re-look at the rules of equity investing:

1. Invest in equities only if you have a long term perspective, that is, you won't have to withdraw for at least 5 to 7 years. If you are clear about this, it does not matter if you start investing in a bull market or a bear market.

2. Withdraw your money only if you need it. For instance, if you have invested in equities to build a corpus for your retirement which is 10 years away, there is no reason to withdraw because of a single day's events.

3. Never invest all your money in one go. Invest in parts. Do a Systematic Investment Planning (SIP). It is a disciplined way of investing irrespective of the state of the market.

4. Diversify your investments.

5. Don’t use the market to make a quick buck. The market is erratic and unpredictable. Nobody has ever timed it perfectly.

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